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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-22974
CMC INDUSTRIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 62-1434910
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OF ORGANIZATION) IDENTIFICATION NO.)
4950 PATRICK HENRY DRIVE, SANTA CLARA, CA 95054
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
-------------------------------
(408) 982-9999
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LAST PRACTICABLE DATE.
COMMON STOCK, $.01 PAR VALUE -7,681,798 SHARES
OUTSTANDING AS OF MAY 31, 1999
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INDEX
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Balance Sheets 3
Statements of Income 4
Statements of Cash Flows 5
Notes to Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-13
Item 3. Quantitative and Qualitative Disclosure About Market Risks 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 13-14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
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CMC Industries, Inc.
Condensed Consolidated Balance Sheets
(In Thousands)
April 30, 1999 July 31, 1998
Unaudited (*)
-------------- -------------
ASSETS
Current assets
Cash and cash equivalents $ 5,260 $ 5,281
Accounts and notes receivable, net 21,290 31,282
Accounts and notes receivable from affiliate 4,712 5,678
Inventories 30,838 20,275
Other current assets 1,499 2,000
-------- --------
Total current assets 63,599 64,516
Notes receivable from affiliate 950 1,400
Plant and equipment, net 19,276 18,790
Investment in preferred stock of affiliate 5,884 5,884
Other assets 4,296 4,015
-------- --------
$ 94,005 $ 94,605
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable under lines of credit $ 9,919 $ 18,111
Current portion of long-term debt 1,647 2,146
Accounts payable 31,227 21,365
Other current liabilities 5,189 7,301
-------- --------
Total current liabilities 47,982 48,923
Long-term debt 4,547 2,268
Other liabilities 1,364 1,469
-------- --------
Total liabilities 53,893 52,660
Stockholders' equity
Common stock 78 76
Additional paid-in capital 36,831 36,157
Retained earnings 3,644 6,153
Treasury stock (441) (441)
-------- --------
Total stockholders' equity 40,112 41,945
-------- --------
$ 94,005 $ 94,605
======== ========
* Condensed from audited consolidated financial statements.
See notes to unaudited condensed consolidated financial statements.
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CMC Industries, Inc.
Condensed Consolidated Statements of Income
(In thousands, except per share data)
UNAUDITED
Three Months Ended Nine Months Ended
April 30, April 30,
-------------------------- --------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Net sales $ 58,677 $ 58,565 $ 206,991 $ 237,612
Cost of sales 56,405 54,596 200,538 222,580
--------- --------- --------- ---------
Gross profit 2,272 3,969 6,453 15,032
Selling, general and administrative expenses 2,907 2,731 9,354 9,012
--------- --------- --------- ---------
Operating income (loss) (635) 1,238 (2,901) 6,020
Interest expense, net 280 311 1,114 1,063
--------- --------- --------- ---------
Income (loss) before income taxes (915) 927 (4,015) 4,957
Provision (benefit) for income taxes (343) 347 (1,506) 1,858
--------- --------- --------- ---------
Net income (loss) $ (572) $ 580 $ (2,509) $ 3,099
========= ========= ========= =========
Net income (loss) per common share
Basic $ (0.07) $ 0.08 $ (0.33) $ 0.44
Diluted $ (0.07) $ 0.08 $ (0.33) $ 0.41
Weighted average shares outstanding
Basic 7,657 7,440 7,606 7,104
Diluted 7,657 7,724 7,606 7,495
See notes to unaudited condensed consolidated financial statements.
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CMC Industries, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
UNAUDITED
Nine Months Ended April 30,
----------------------------
1999 1998
-------- --------
Cash flows from operating activities:
Net income (loss) $ (2,509) $ 3,099
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,603 1,629
Change in assets and liabilities:
Receivables 11,408 (5,842)
Inventories (10,563) 4,448
Accounts payable 9,862 (3,207)
Other assets and liabilities (2,216) 842
-------- --------
Net cash provided by operating activities 8,585 969
-------- --------
Cash flows from investing activities:
Capital expenditures (1,928) (2,027)
Payments for equipment held for sale and leaseback -- (1,099)
Deposits for facility under construction in Mexico -- (2,135)
Other -- (1,559)
-------- --------
Net cash used in investing activities (1,928) (6,820)
-------- --------
Cash flows from financing activities:
Borrowings under lines of credit, net (8,192) 4,278
Proceeds from long-term debt 2,092 --
Principal payments on long-term debt (1,254) (1,268)
Proceeds from issuance of stock 676 4,362
-------- --------
Net cash provided by (used in) financing activities (6,678) 7,372
-------- --------
Net increase (decrease) in cash and cash equivalents (21) 1,521
Cash and cash equivalents at beginning of period 5,281 4,298
-------- --------
Cash and cash equivalents at end of period $ 5,260 $ 5,819
======== ========
See notes to unaudited condensed consolidated financial statements.
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CMC INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
reflect all normal recurring adjustments which are, in the opinion of
management, necessary to present fairly the financial position and results of
operations and cash flows in conformity with generally accepted accounting
principles. The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the full year. For
further information, refer to the financial statements included in the Company's
Annual Report on Form 10-K for the fiscal year ended July 31, 1998.
NOTE 2 - INVENTORIES
The components of inventories were as follows (in thousands):
April 30, July 31,
1999 1998
--------- --------
Raw materials and purchased components $ 28,877 $ 17,868
Work-in-process 875 1,637
Finished goods 1,086 770
-------- --------
$ 30,838 $ 20,275
======== ========
NOTE 3 - NET INCOME PER SHARE
Earnings per share ("EPS") is calculated in accordance with the
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per
Share," which requires the presentation of basic and diluted earnings per share.
Basic EPS was computed by dividing net income by the weighted average number of
common shares outstanding during the period. Diluted EPS was calculated by
dividing net income by the weighted average number of common shares outstanding
and dilutive common stock equivalent shares outstanding during the respective
periods. Common equivalent shares consist of stock options included in the
computation of EPS using the treasury stock method. A reconciliation of basic
earnings per share to diluted earnings per share for the past three fiscal years
is shown in the following table (in thousands, except per share data):
Years Ended
--------------------------------------------------------------------------------------------
July 31, 1998 July 31,1997 July 31, 1996
----------------------------- ------------------------------ ---------------------------
Net Per Share Net Per Share Net Per Share
Earnings Shares Amount Earnings Shares Amount Earnings Shares Amount
-------- ------ ------ -------- ------ ------ -------- ------ ------
BASIC EPS
Earnings available to
Common shareholders $2,531 7,205 $0.35 $1,606 6,757 $0.24 $105 6,235 $0.02
EFFECT OF DILUTIVE SECURITIES
Stock Options 348 410 214
----- ----- -----
DILUTED EPS
Earnings available to
Common shareholders ------ ----- ------ ----- ---- -----
Plus assumed conversions $2,531 7,553 $0.34 $1,606 7,167 $0.22 $105 6,449 $0.02
==========================================================================================
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NOTE 4 - SUBSEQUENT EVENT
On May 10, 1999, the Company entered into a definitive merger agreement
with ACT Manufacturing, Inc. ("ACT"), a provider of value-added electronics
manufacturing services for original equipment manufacturers in the networking
and telecommunications, computer, industrial and medical equipment markets. The
closing of the merger with ACT (the "Merger") is subject to the approval of the
shareholders of ACT and the Company, various regulatory approvals and other
customary closing conditions. Under the terms of the agreement, each share of
CMC common stock will be exchanged for 0.5 shares of ACT common stock. The
Merger is expected to be accounted for as a pooling of interest.
CMC INDUSTRIES, INC.
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
CMC Industries, Inc. ("CMC" or the "Company") was incorporated in 1990
to acquire certain businesses operated from the Company's Corinth, Mississippi
manufacturing facility since 1960. In August 1993, the Company transferred
certain assets and related liabilities associated with its telecommunications
business to Cortelco Systems Holding Corp. ("Cortelco"), a newly-formed company
owned by certain of the Company's existing stockholders, in exchange for
1,000,000 shares of Preferred Stock of Cortelco. These transactions effectively
transferred to Cortelco all of the Company's assets and liabilities not related
to its contract manufacturing business. This restructuring allowed CMC to focus
on contract manufacturing services while Cortelco pursued the development and
distribution of telephones and telecommunications products.
On May 10, 1999, the Company entered into a definitive merger agreement
with ACT Manufacturing, Inc. ("ACT"), a provider of value-added electronics
manufacturing services for original equipment manufacturers in the networking
and telecommunications, computer, industrial and medical equipment markets. The
closing of the merger with ACT (the "Merger") is subject to the approval of the
shareholders of ACT and the Company, various regulatory approvals and other
customary closing conditions. Under the terms of the agreement, each share of
CMC common stock will be exchanged for 0.5 shares of ACT common stock. The
Merger is expected to be accounted for as a pooling of interest.
Set forth below are analyses of the Company's results of operations for
the three and nine months ended April 30, 1999.
RESULTS OF OPERATIONS
Sales for the third quarter of fiscal year 1999 were $58.7 million as
compared to $58.6 million for the corresponding quarter of the prior year. Sales
for the first nine months of fiscal 1999 were $207.0 million, a 13% decrease
from sales of $237.6 million for the same period of the prior year. Sales to
customers other than Micron Electronics, Inc. ("Micron"), with which business
was discontinued at the end of the second quarter of fiscal 1998, increased
during the first nine months of fiscal 1999 by $40.8 million (to $207.0 million
from $166.2 million) when compared to the corresponding period of the prior
year. For further information on the termination of the Micron business, refer
to the Company's Form 10Q for the quarterly period ended January 31, 1998.
Sales to three customers new to the Company in fiscal 1999, Next Level
Communications ("Next Level"), Telular Corporation ("Telular") and Proxim, Inc.
("Proxim"), were $1.7 million, $1.8 million and $1.3 million,
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respectively, for the third quarter of fiscal 1999 and $16.2 million, $2.9
million and $1.5 million, respectively, for the first nine months of fiscal
1999. Sales to Diamond Multimedia Systems, Inc. ("Diamond") increased during the
third quarter and first nine months of fiscal 1999 when compared to the same
periods of fiscal 1998 by $6.2 million and $47.6 million, respectively, due to
both an increase in shipments and the conversion of the business from
consignment to turnkey. Sales to new customers and the increase in sales to
Diamond were partially offset by the loss of business with Global Village
Communications ("Global Village") following the sale of its modem business to
Boca Research, Inc. ("Boca") in June 1998. Sales to Global Village were $6.1
million and $26.9 million in the third quarter and first nine months of fiscal
1998, respectively, but sales to Boca have been minimal in fiscal 1999.
Gross profit for the third quarter of fiscal 1999 was $2.3 million or
3.9% of sales, as compared to $4.0 million or 6.8% of sales for the third
quarter of fiscal 1998. Gross profit for the first nine months of fiscal 1999
was $6.5 million or 3.1% of net sales, as compared to $15.0 million or 6.3% for
the same period of the prior fiscal year. Gross profit as a percentage of sales
decreased in the third quarter and first nine months of fiscal 1999 when
compared to the corresponding periods of the prior fiscal year principally as a
result of increases in manufacturing overhead costs incurred in anticipation of
higher sales volumes and costs associated with the initiation of new
manufacturing projects. There can be no assurance that any anticipated increase
in sales will occur or that sales will not decrease in future periods. See
"Factors that May Affect the Company".
Selling, general and administrative expenses were $2.9 million or 5.0%
of sales in the third quarter of fiscal 1999, as compared to $2.7 million or
4.7% of sales in the third quarter of fiscal 1998. Such expenses were $9.4
million or 4.5% of sales in the first nine months of fiscal 1999, as compared to
$9.0 million or 3.8% of sales for the corresponding period of the prior year.
Selling, general and administrative expenses were higher on an absolute basis in
the fiscal 1999 periods than in the corresponding periods of fiscal 1998
primarily due to an increase in the Company's sales force and related expenses.
Such expenses as a percentage of sales also increased in the first nine months
of fiscal 1999 as compared to the corresponding period of the prior year due to
the lower sales levels.
Interest expense for the third quarter and first nine months of fiscal
year 1999 was $401,000 and $1,114,000, respectively, as compared to $311,000 and
$1,063,000 for the corresponding periods of fiscal 1998. Interest expense
increased in the third quarter and first nine months of fiscal 1999 when
compared to the corresponding periods of the prior fiscal year primarily due to
an increase in average debt balances associated with the funding of the
Company's expansion of capacity in Mexico. The effect of the higher interest
expense in the fiscal 1999 periods was partially offset by the recognition in
the Company's third fiscal quarter of $121,000 of interest income on a note
receivable from Cortelco. See "Factors that May Affect the Company".
The Company's effective income tax rate was approximately 38%
throughout the first nine months of both fiscal years 1999 and 1998. The
effective income tax rate approximates the blended state and federal statutory
rates in the United States and Mexico.
FACTORS THAT MAY AFFECT THE COMPANY
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Actual results could
differ materially from those projected in the forward-looking statements as a
result of certain of the risk factors set forth below and elsewhere in this
document. In addition to the other information contained and incorporated by
reference in this document, the following factors should be considered carefully
in evaluating the Company and its business.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS. The Company's operating
results are affected by a number of factors, including the timing and mix of
manufacturing projects, capacity utilization, price competition, the
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degree of automation that can be used in the assembly process, the efficiencies
that can be achieved by the Company in managing inventories and fixed assets,
the timing of orders from customers, fluctuations in demand for customer
products, the timing of expenditures, customer product delivery requirements,
increased costs and shortages of components or labor and economic conditions
generally. All of these factors can cause substantial fluctuations in the
Company's operating results. The Company's expenditures (including, but not
limited to, equipment, inventory and labor) are based, in part, on its
expectations as to future revenues and, to a large extent, are fixed in the
short term. Accordingly, the Company has in the past and may in the future be
unable to adjust spending in a timely manner to compensate for any unexpected
shortfall in revenues, and any significant shortfall of demand in relation to
the Company's expectations or any material delay or cancellation of customer
orders could have an almost immediate material adverse effect on the Company's
operating results. As a result of these and other factors, it is possible that
in some future period, the Company's operating results could fail to meet the
expectations of public market analysts or investors. In such events, or in the
event that adverse conditions prevail or are perceived to prevail generally or
with respect to the Company's business, the trading price of Company's Common
Stock could drop significantly.
The Company's gross profit as a percentage of sales in future periods
may be materially adversely affected by various factors associated with the
Company's production of new product lines, acquisition of new manufacturing
equipment and continued dependence on turnkey contracts (and the inventory risks
inherent therein). Expansion of capacity will result in a higher fixed cost
structure which will require increased revenue and/or significant improvements
in operating efficiencies in order to maintain historical gross margins.
Additionally, the commencement of production of new products typically involves
significant startup costs, lower yields and other inefficiencies. New products
do not generate gross margins as high as products which have been in volume
production for several months. The Company also expects that competition may
continue to intensify, which could also result in lower gross margins.
CUSTOMER CONCENTRATION; DEPENDENCE ON INDUSTRY TRENDS. A small number
of customers are currently responsible for a significant portion of the
Company's net sales. In the nine months ended April 30, 1999 and fiscal years
ended July 31, 1998, 1997 and 1996, the Company's four largest customers in such
periods accounted for approximately 65%, 56%, 61%, and 63%, respectively, of
consolidated net sales. Sales to Micron Electronics, Inc., with whom business
was discontinued in the second quarter of fiscal 1998, accounted for
approximately 24% and 21% of the Company's revenues for the fiscal years ended
July 31, 1998 and July 31, 1997, respectively. Any material delay, cancellation
or reduction of orders from these or other customers could have a material
adverse effect on the Company's results of operations.
The percentage of the Company's sales to its major customers may
fluctuate from period to period. Significant reductions in sales to any of these
customers, or failure to pay in full by any customer of amounts owed to the
Company, could have a material adverse effect on the Company's results of
operations. In addition, customer contracts can be canceled and volume levels
may be materially changed or delayed. The timely replacement of canceled,
delayed or reduced contracts with new business cannot be assured. These risks
are exacerbated because the Company's sales are to customers in segments of the
electronics industry subject to rapid technological change and product
obsolescence. The factors affecting these industries in general, or any of the
Company's major customers in particular, could have a material adverse effect on
the Company's results of operations.
RELATIONSHIP WITH CORTELCO. The Company has had numerous transactions
with its former affiliate and customer, Cortelco Systems Holding Corp.
("Cortelco"). David S. Lee, a director of the Company, is also a director of
Cortelco, and is the largest stockholder of each of the Company and Cortelco.
Transactions between the Company and Cortelco include the transfer of certain
assets and related liabilities associated with the telephone business to
Cortelco in exchange for 1,000,000 shares of Preferred Stock of Cortelco in
August 1993 and the execution of an agreement to provide certain products and
related support services to customers of Cortelco.
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In March 1999, CMC consented to a restructuring of certain assets of
Cortelco. In connection with this restructuring, Cortelco distributed common
stock of Cortelco Systems, Inc. ("CSI") to its shareholders on a pro rata
basis. Pursuant to this distribution, CMC and Cortelco entered into a Stock
Distribution Agreement and CMC received its pro rata share which was equal to
6,125,302 shares of common stock of CSI. CMC also entered into a Stock Purchase
Agreement with Mr. Lee under which, through a series of "put" and "call"
rights, Mr. Lee effectively guarantees CMC's right to receive not less than
approximately $5.9 million in respect of the common stock of CSI and the
preferred stock of Cortelco by May 2002. In consideration for the receipt of
Mr. Lee's guarantee, CMC consented to an amendment to Cortelco's Certificate of
Incorporation which, among other things, delays the dates on which the
preferred stock may be tendered for redemption by CMC.
Furthermore, Cortelco's wholly-owned subsidiary, Cortelco Puerto Rico,
merged into CSI in connection with the above identified distribution. CSI merged
with BCS Technologies, Inc., with CSI being the surviving entity. Finally, CSI
filed a Form S-1 in April 1999 and currently intends to complete an initial
public offering later this year. The Company intends to be a selling shareholder
of shares of common stock in CSI's initial public offering. There can no
assurances that such sale will occur or what the proceeds will be from such
sales, if any.
Historically, Cortelco has not been as current as other customers in
making payments on its trade accounts with the Company. In July 1998, the
Company converted certain older accounts receivable from Cortelco totaling $2.0
million into a note receivable. Under the terms of the note, Cortelco has agreed
to pay the balance over a three-year term with monthly payments of $50,000, plus
interest and a final installment of $200,000 due at the end of the three-year
period. Interest accrues on the note at a rate of 9.0% per annum. As of April
30, 1999, Cortelco had made all payments required at that date under the terms
of the note. The Company continues to provide credit for manufacturing services
sold to Cortelco in the form of trade receivables, and as of April 30, 1999, had
approximately $4.1 million in trade receivables from Cortelco. Cortelco's
payments on its trade accounts with the Company have in the past been late, and
there can be no assurances that such payments or payments on the note will in
the future be made on a timely basis, if at all.
COMPETITION. The electronics manufacturing services industry is
comprised of a large number of companies, several of which have achieved
substantial market share. The Company also faces competition from current and
prospective customers, which evaluate the Company's capabilities against the
merits of manufacturing products internally. The Company competes with different
companies depending on the type of service or geographic area. Certain of the
Company's competitors have broader geographic breadth. They also may have
greater manufacturing, financial, research and development and marketing
resources than the Company. The Company believes that the primary basis of
competition in its targeted markets is manufacturing technology, quality,
responsiveness, and the provision of value-added services and price. To be
competitive, the Company must provide technologically advanced manufacturing
services, high product quality levels, flexible delivery schedules and reliable
delivery of finished products on a timely and price competitive basis. The
Company currently may be at a competitive disadvantage as to price when compared
to manufacturers with lower cost structures, particularly with respect to
manufacturers with established facilities in regions where labor costs are
lower.
SHORTAGES OF ELECTRONICS COMPONENTS. Most of the Company's net sales
are derived from turnkey manufacturing services in which the Company procures
components from third-party suppliers and bears the risk of component shortages.
The electronics industry has been characterized by shortages from time to time
in semiconductor and other components, which shortages have led to allocations
by third-party suppliers. The Company's inability to procure desired supplies of
certain components has in the past led, and may in the future lead, to some
delays in shipments by the Company to its customers. These delays to date have
not had a material adverse effect on the Company's results of operations. If
these component shortages persist or intensify, however, the Company may not be
able to secure quantities required to fulfill customer orders, which could
result in delays in shipments, or cancellation or delays in customer orders,
each of which could have a material adverse effect on the Company's results of
operations.
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MANAGEMENT OF GROWTH. There can be no assurance that the Company will
successfully manage the integration of new business and the growth, if any, of
the Company's operations. In addition, the Company may experience certain
inefficiencies as it manages geographically dispersed operations. Should the
Company increase its expenditures in anticipation of a future level of sales
which does not materialize, its results of operations could be materially
adversely affected. On occasion, customers may require rapid increases in
production which can place an excessive burden on the Company's resources. There
can be no assurance that the Company will be capable of meeting the demands
placed upon the Company's resources by these or any other customers.
ENVIRONMENTAL COMPLIANCE. The Company is subject to a variety of
environmental regulations relating to the use, storage, discharge and disposal
of hazardous chemicals used during its manufacturing process. Any failure by the
Company to comply with present and future regulations could subject it to future
liabilities or the suspension of production. In addition, such regulations could
restrict the Company's ability to expand its facilities or could require the
Company to acquire costly equipment or to incur other significant expenses to
comply with environmental regulations. In this regard, see "Legal Proceedings."
RISK OF DEFECTS. The electronics products manufactured for customers by
the Company are highly complex and may at times contain undetected design and/or
manufacturing errors or failures. Such defects have been discovered in the past,
and there can be no assurance that, despite the Company's quality control and
quality assurance efforts, such defects will not occur in the future. If such
defects occur in quantities or too frequently, the Company's business and
operating results may be materially and adversely affected.
DEPENDENCE ON KEY PERSONNEL AND SKILLED EMPLOYEES. The Company's
continued success depends to a large extent upon the efforts and abilities of
key managerial and technical employees. The loss of services of certain key
personnel could have a material adverse effect on the Company. The Company's
business also depends upon its ability to continue to attract and retain senior
managers and sales representatives and other skilled employees. Failure to do so
could have a material adverse effect on the Company's operations.
POSSIBLE VOLATILITY OF MARKET PRICE OF COMMON STOCK. The trading price
of the Company's Common Stock is subject to significant fluctuations in response
to variations in quarterly operating results, general conditions in the
electronics manufacturing services industry as well as the industries of the
Company's customers, and other factors. In addition, the stock market is subject
to price and volume fluctuations which affect the market price for many high
technology companies in particular, and which may or may not be unrelated to
operating performance. Also, the trading price of the Company's Common Stock may
be affected by the announcement of its Merger with ACT. There can be no
assurance as to the trading price of the Company's Common Stock at any time in
the future. In this regard, see "Note 4 to the Condensed Consolidated Financial
Statements".
LIQUIDITY AND CAPITAL RESOURCES
The Company's bank loan agreement is comprised of a revolving credit
line of $30 million and a $5 million term loan. At April 30, 1999, total
borrowings under this facility were $9.9 million under the revolving credit line
and $4.8 million under the term loan. The loan agreement contains financial
covenants related to the Company's net worth and debt service coverage and
restricts capital expenditures. At April 30, 1999 the Company was in default
under the net worth and debt service covenants and has requested a waiver from
the bank with respect to such covenants.
The Company leases its U.S. manufacturing facilities and certain
equipment using both capital and operating lease arrangements. At April 30,
1999, future minimum lease payments under the non-cancelable portion of lease
agreements were $17.6 million, of which $7.2 million is scheduled for payment in
the next twelve months.
The Company's cash and cash equivalents decreased by $21,000 to
$5,260,000 during the nine months ended April 30, 1999. During this period, the
Company's operations provided cash of $8.6 million resulting from
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the netting of a $9.9 million increase in accounts payable, a net profit before
depreciation and amortization of $94,000, a $10.6 million increase in
inventories, an $11.4 million decrease in accounts receivable, a $2.1 million
decrease in accrued liabilities and a $104,000 change in other assets and
liabilities.
The Company used cash of $1.9 million in investing activities during
the nine months ended April 30, 1999, including $535,000 for payments on the
Hermosillo, Mexico facilities. Cash expended in other investing activities was
principally to improve leaseholds and to acquire manufacturing equipment.
Cash used in financing activities in the nine months ended April 30,
1999 totaled $6.7 million on a net basis. Cash provided included $2.1 million of
long-term debt proceeds and $676,000 from the issuance of approximately 169,482
shares of the Company's Common Stock under the Company's stock option and
employee stock purchase plans. Cash used included $8.2 million to reduce
outstanding borrowings under the Company's revolving credit line and $1.3
million to repay long-term debt and capital lease obligations.
The Company's needs for financing in the next twelve months may include
increases in working capital to support sales growth, if any, and expansion of
capacity (plant and equipment). During fiscal 1998, the Company purchased a
4.4-acre tract of land in Hermosillo, Mexico and a 110,000 square foot
manufacturing plant located at this site. The final payment of approximately
$100,000 for this facility is expected to be made in the fourth quarter of
fiscal 1999 using cash on hand and funds available under the Company's lines of
credit, although there can be no assurance of this. The Company expects to meet
its other short-term liquidity requirements generally through net cash provided
by operations, vendor credit terms, operating lease arrangements and short-term
borrowings under its lines of credit.
The Company from time to time evaluates possible business acquisitions,
facility additions and expansion of capabilities. The Company may seek
additional financing as needed to pursue growth opportunities, including any
expansion of capacity; however, there can be no assurance that such financing
will be available on terms acceptable to the Company, if at all.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any
manufacturing equipment, computer programs or computer hardware used by the
Company that have date-sensitive software or embedded chips may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to operate equipment, process
transactions, send invoices, or engage in similar normal business activities.
The Company determined in its initial assessment that only
insignificant portions of hardware and software required modification or
replacement so that those systems would properly utilize dates beyond December
31, 1999. The Company presently believes that due to completion of minor
modifications to existing hardware and software, the Year 2000 Issue has been
substantially mitigated, although there can be no assurance of this.
The Company's plan to resolve the Year 2000 Issue involved four phases;
assessment, remediation, testing and implementation. The Company believes that
it has completed its assessment of all material systems that could be affected
by the Year 2000 Issue. The completed assessment indicated that most of the
Company's significant information technology systems and software and hardware
used in manufacturing equipment (hereafter also referred to as operating
equipment) would not be materially affected, although there can be no assurance
of this. Further, the Company does not conduct a significant portion of its
vendor purchase transactions through systems that interface directly with
suppliers.
For its information technology exposures, the Company believes that it
has completed the remediation phase and all software reprogramming and
replacement for all material systems. To date, the Company believes
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that it has completed its testing and has implemented all of its remediated
systems. However, there can be no assurance that such implementation has
resolved all related Year 2000 issues.
For its operating equipment exposures, the Company believes that it has
completed the remediation phase of the resolution process, although there can be
no assurance of this. Testing of this equipment was more difficult than its
information technology systems but the Company believes that it has completed
its testing and implementation of affected equipment; however, there can be no
assurance that such implementation has resolved all related Year 2000 issues.
With respect to third parties, the Company currently has no material
systems that interface directly with significant vendors. The Company has
queried its important suppliers regarding Year 2000 readiness but to date is not
aware of any problems that would materially impact results of operations,
liquidity or capital resources. However, the Company has no means of ensuring
that these third parties will be Year 2000 ready and any inability of those
parties to complete their Year 2000 resolution process could materially impact
the Company.
The Company primarily utilized internal resources to reprogram, to
replace, test and implement, as needed, the software and operating equipment for
Year 2000 modifications. To date, the total cost of the Year 2000 project has
not materially affected the Company's business or results of operations.
However, there can be no guarantee that unexpected events will not occur and
actual results could be materially adversely affected. Specific factors that
might cause such material adverse effects include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes and similar uncertainties.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
The Accounting Standards Executive Committee has issued Statement of
Position ("SOP") 98-5, Reporting on the Costs and Start-up Activities, effective
for fiscal years beginning after December 15, 1998 (fiscal 2000 for the
Company). SOP 98-5 requires the costs of start-up activities and organization
costs to be expensed as incurred. In fiscal 1998, the Company capitalized $1.2
million of start-up costs incurred to begin manufacturing operations in
Hermosillo, Mexico. The Company plans to amortize 20%, or $240,000, in fiscal
1999 and expense the balance of $960,000 in fiscal 2000 upon adoption of SOP
98-5.
CMC INDUSTRIES, INC.
Item 3
QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK
None
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company is involved from time to time in litigation incidental to
its business.
In December 1993, the Company retained the services of an industrial
safety consultant to assist in quantifying the potential exposure to the Company
in connection with clean-up and related costs of a former manufacturing site,
commonly known as the ITT Telecommunications site in Milan, Tennessee and more
particularly described as a 50.1 acre tract surveyed by Construction Layout
Service of Milan, Tennessee. The consultant initially estimated that the cost to
remove the contaminated soil and deliver it to an appropriate
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hazardous waste site would be approximately $200,000. Based upon this advice,
the Company subsequently entered into a voluntary agreement to investigate the
site with the Tennessee Department of Environment and Conservation. In addition,
the Company agreed to reimburse a tenant of the site $115,000 for expenditures
previously incurred to investigate environmental conditions at the site. The
Company recorded a total provision of $320,000 based on these estimates. In
fiscal 1995, an environmental expert concluded that the cost of a full study
combined with short and long-term remediation of the site may cost between $3
and $4 million. During fiscal 1996, the State of Tennessee's Department of
Environment and Conservation named certain potentially responsible parties
("PRPs") in relation to the former facility. The Company was not named as a PRP.
However, Alcatel, Inc., a PRP named by the State of Tennessee's Department of
Environment and Conservation and a former owner of the Company, is seeking
indemnification from the Company. To date, Alcatel has not filed any legal
proceedings to enforce its indemnification claim. However, there can be no
assurance that Alcatel will not initiate such proceedings or that any other
third parties will not assert claims against the Company relating to remediation
of the site. In the event any such proceedings are initiated or any such claim
is made, the Company believes it has numerous defenses which it will vigorously
assert. There can be no assurance that if any proceedings are initiated or any
such claim is asserted, defense or resolution of such matter will not have a
material adverse effect on the Company's financial position or results of
operations.
In connection with a fiscal 1996 staff reduction, certain terminated
employees subsequently claimed that the Company had engaged in age
discrimination in their dismissal and sought damages of varying amounts. The
Company defended the actual and threatened claims vigorously during fiscal 1998
incurring approximately $275,000 in legal costs over the course of the year. On
August 6, 1998, a judgment was rendered in the favor of one plaintiff in the
amount of $127,000, which the Company subsequently settled for $112,000. A
second plaintiff's claim for $53,000 was filed and subsequently settled for
$48,500. The EEOC negotiated with the Company to reach a monetary settlement for
other potential claimants. Without admitting any liability, the Company entered
into a Conciliation Agreement with the EEOC and agreed to pay approximately
$500,000 to settle all such claims and limit future litigation costs. As a
result of these events and the significant ongoing costs to defend these claims,
in October 1998, the Company concluded that its interest would be best served to
settle all such matters. The Company reserved $975,000 to resolve all such
claims, which represented its best estimate of funds to ultimately be paid to
such claimants. This charge was recorded in the fiscal year ended July 31, 1998.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit Description
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10.1 Stock Distribution Agreement between CMC Industries, Inc. and Cortelco
Systems Holding Corp. dated March 15, 1999.
10.2 Stock Purchase Agreement between CMC Industries, Inc. and David S. Lee dated
March 15, 1999.
10.3 Registration Rights Agreement between CMC Industries, Inc. and Cortelco
Systems, Inc. dated March 15, 1999.
27.1 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the
Company during the quarter ended April 30, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CMC INDUSTRIES, INC.
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Registrant
Date: June 8, 1999 /s/ Matthew G. Landa
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Matthew G. Landa
President and Chief Executive
Officer
Date: June 8, 1999 /s/ Andrew J. Moley
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Andrew J. Moley
Executive Vice President and
Chief Financial Officer
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